The History : Famous Crashes of the West-The Great Crash of 1929

THE GREAT CRASH OF 1929

Our final excursion to Manialand takes us much nearer ‘home’ in terms of time and subject matter. Even after nearly sixty years, it is difficult to put the Great Crash into perspective. The Crash probably contributed to the Great Depression which lasted nearly twelve years. it contributed indirectly to the rise of Hitler and the Second World War. Furthermore, it changed the legal environment of stock trading in the US and traumatized a whole generation of money men and investors so much so that for more than thirty years, investments all over the world were conducted on a most prudent basis. In addition, the personal sufferings it brought about as a result of bankruptcy can never be fully told. The magnitude of the drop of stock prices has never been repeated since. For example, the Dow Jones Industrial Averages (here. after known as the Dow) dropped from 381 in September 1929 to 41 in July 1932, a loss of nearly 90 per cent. This would be equivalent to the Kuala Lumpur Stock Exchange (KLSE) index dropping to 89 from the peak of 823 it reached in June 1981. (The 1973 Hong Kong Stock market Crash actually exceeded the percentage fall experienced by the Dow but it was then a much smaller market). Seen in that light, it is not difficult to see why the Great Crash of 1929 would always be spoken of with fear and awe.

What is of interest to us would be the environmental conditions prior to the rise and the factors which contributed to its phenomenal ascend. As Galbraith puts it so well: ‘the collapse of the stock market was implicit in the speculation that went before. The only question concerning that speculation was how long it would last This is the way (all) speculations will end in the future’.1 The fall or crash must come eventually.

Like all speculative manias, the Great Crash satisfied certain preconditions in the environment. Whilst there were pockets of poverty in the US during the early 1920s, these were generally very good years. Recovering from the effects of the First World War, the US began to exercise its industrial might and American heavy industrial goods soon dominated the world’s market. Between 1925 and 1929, the number of

manufacturing plants rose from 183,900 to 206,700 and their output from US$60 billion to US$68 billion. In 1926 alone 4.3 million cars were produced and by 1929, production had risen to 5.4 million. The number of cars produced in a year was not to reach this figure again until 1953! It was a good time to be in business for the laws governing business of today barely existed then. Businessmen (and brokers too) were largely self-regulated.

On the whole, there were more well-off people than ever before. It

was also easy to borrow money. Stocks could be bought for 10 per cent margin (this means that US$1,000 worth of shares could be bought with US$100 cash and US$900 from loans) and banks were willing to lend. However, more important than the easily available credit was the mood of the people that led to the speculative mania. Speculation of the scale that went on required millions of people acting with the same objective in mind. The individuals who were drawn in must have shared the common conviction that the common people could and were in fact, meant to be rich. In addition, ‘people must also have faith in the good intentions or even benevolence of others ….”. To buy shares at grossly inflated prices requires a supreme act of faith that the brokers are telling the truth and that the companies behind the shares are solid, well-run and have a future. Professor Dice, writing in 1929, on this blind faith of the common people had this explanation:

The common folks believe in their leaders. We no longer looked upon the captains of industry as magnified crooks. Have we not heard their voice over the radio? Are we not familiar with their thoughts, ambitions, and ideals as the} have expressed them to its almost as a man talks to his friends?

Galbraith again, ‘Such a feeling of trust is essential for a boom. When people are cautious, questioning, misanthropic, suspicious or mean, they are immune to speculative enthusiasm.

Also, there must be high savings and rising incomes. Apart from high savings, the savings must appear to be increasing rapidly. When one’s saving or income is increasing rapidly, one tends to place less value on it.

Thus, all the pre-conditions were in place for the boom to begin in the 19205. Once the boom had started it developed momentum of its own since the earlier entrants began to enrich themselves and the stories of their rapid success attracted others. They, in turn, boosted the prices further which made the stories even more attractive. More and more people were drawn into the stock market. This alone could not have caused the market to rise to such heights. As in all manias, the rising market and the presence of the common folks attracted the opportunists into the market for their own ends. The optimism and the blind faith made market manipulation a very easy task. During 1928 ind 1929, great manipulators made their appearances. Individuals like Jesse Livermore, William Durant, the founder of General Motors

(GM), and J.J. Raskob made huge fortunes and became household names. Curiously though, they were held in awe rather than in contempt or hatred. These manipulators operated with ‘pools’ (syndicates) which possessed enormous funds or had access to large bank facilities. Interest in a share was generated by artificial transaction; among the pool operators in connivance with the brokers (the so called ‘boiler-room operations’). The prices would move up steadily with high Volume. At the same time, stories of impending takeovers or extra. ordinary profit would be spread with the witting or unwitting co. operation of the press. The public would scramble after the stock and at the right time, the pool operators would unload, leaving the public to hold the ‘baby’. Such an operation was (and still is in Malaysia/ Singapore) entirely legal. The year 1929 was thus an unbelievable year. Blue-chip first doubled and then quadrupled in price. In eighteen months, RCA rose from US$95 to US$505, Air Reduction from US$60 to US$216, General Electric (GE) from US$129 ‘to US$396 and Du Pont from US$98 to US$215.

To be sure, there were some voices calling for rationality. Warnings from academics like Professor Babson for two years that a crash was imminent was largely ignored. In the end, the crash came swiftly and without mercy. From 18 October (a Friday) to 22 October, the price of most of the blue-chips fell by 20 to 40 per cent. On 29 October, (Black Tuesday) alone, RCA lost US$50; Air Reduction US$25; GE US$28; Du Pont US$34 and Auburn Automobile US$60 (30 per cent of its market value). In spite of all attempts by bankers and the New York Stock Exchange (NYSE) to prop up the price, the fall continued. Within a month, the Dow had lost 50 per cent and in the next year, the loss increased to 75 per cent. Within three years, the loss registered by the Dow was 90 per cent. Among the many who committed suicide in the aftermath of the crash was the great Jesse Livermore who shot himself in a seedy hotel and died a penniless bankrupt.

FAMILIARITY OF THE STORIES RELATED

These past episodes of speculative mania, and some of the activities which took place are likely to strike a familiar note. For instance, the action of the Prince of Wales in the South Sea Bubble case may remind you of similar personalities on the local scene. So will the activity of the ‘pool’ manipulator Jesse Livermore in 1929. Also, one has to be reminded that although the big speculators are occasionally caught in the net of their own creation in a crash, it is usually the small investors who have the most to lose in such a situation. Contrary to what the Bible may say, the meek seldom, if ever, inherit the earth where the stock market is concerned.

Speculative manias know no boundary in time and place. They can happen anywhere provided there are in existence the right conditions and people who are ready and willing to speculate.